Make sure you understand …

When you embark on a career in trading or if you just want to try it part-time, you have a lot to learn before you ever hit the enter button a trade.

The actual physical act of trading is child’s play. But all the research that goes into learning the ropes can, in some cases, can take years.

Today I would like to introduce you to some trading terms and try my best to shine a light on them On what they are and why you need to be aware of them. I’m sure many readers already know all this but bear with me here. You never know when you’ll something new. You know the old saying, “Its a good day when you learn something new.”

Open Cross

The Open Cross is a process that generates a single opening price reflective of the true supply and demand of a particular stock as the market opens each day. The method improves upon the current market open and resolves natural stock buy and sell imbalances at the open. The opening cross method prevents large price movements shortly after the market opens, one of the most active trading times.

Prices for the opening cross are determined through an auction process. Buyers and sellers place offers and counteroffers until prices match, resulting in a trade. The objective of the opening cross process is to achieve maximum execution by getting the greatest number of shares of a given security to trade at a single price.

From 9:28 a.m. to 9:30 a.m. (the two minutes prior to the Open), the exchanges gather and publish information about buy or sell interest in a particular stock, including an indicative opening price.

Difference between account types

Cash account (what we call Retirement accounts)

This type of account asks you to deposit cash, and then you can use that cash to buy stocks, bonds, mutual funds, or other investments. You cannot short in this account.

When buying securities in a cash account, the investor must deposit cash to settle the trade or sell an existing position on the same trading day, so cash proceeds are available to settle the ‘buy’ order. (Read about unsettled funds below).

Margin account

In a margin account, the cash and securities in your account act as collateral for a line of credit that you take out from the brokerage in order to buy more stock. The interest rates that brokers charge are lower than typical credit card rates. However, you’ll need to earn a much higher return on your investments than you would if you were only investing with your own cash. At QiT we do not use margin in our margin portfolios but use these accounts for shorting.

Unsettled Cash

First of all, you have to understand what unsettled funds are before you can fix it. If it needs fixing that is. Secondly, this is for CASH accounts (retirement type accounts) so if you trade only Margin then you can ignore this.

Here is what Wikipedia says about unsettled funds, “In the United States, stocks take three days to settle. If you buy on Monday, you don’t pay for the purchase until Thursday. This is known as trade day plus 3 days or T+3.

“This three day settlement period is considered an extension of credit from the broker to the customer. Because the transaction is considered a credit issue, the Federal Reserve Board is responsible for the rule which is officially called Regulation T.

“If a brokerage customer is approved for margin on the account there will be a line of credit to ‘cushion’ the three day settlement period. This credit allows customers to trade while the cash settles. For accounts without margin (cash accounts), stock traders must have enough cash in the account to pay for any purchases the day they are due. A client in good faith agrees to make full payment of settled funds or deposit securities within the three day settlement period and not to sell before making such payment.”

I didn’t know this

When you trade with QiT, we assume the funds are freed up from a SELL and will be available to you immediately. In other words, you do not have to wait 3 days to use those funds. If you have to wait, how do you “fix” this? The short answer is you can’t. You have to use a broker who offers a Margin Cash Account, an oxymoron if you ask me.

Please make sure you have a broker that offers Margin Cash Accounts if you trade a retirement account.

Some brokers, like Interactive Brokers, will “lend” you the funds until they clear three days later much like they do in a Margin account. Nothing else is different and you still cannot short this account.

Please make sure you have a broker that offers Margin Cash Accounts if you trade a retirement account.

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